Sigrún Davíðsdóttir's Icelog

‘How far are you in reading the report?’ is a question that everyone asks in Iceland these days. The report in question is of course the report of the Investigative Commission, published April 12. The 2600 pages offer a lot of information to mull over regarding the banks and the public sector, including the Financial Services Authority, FME and the Central Bank.

One of the most important findings is that the banks didn’t fail because of evil foreigners – hedge funds, the UK Treasury or the FSA or any other foreign force. The banks collapsed because they were allowed to grow too quickly. In addition, there were some serious anomalies within the banks: the main shareholders used ‘their’ banks as their personal ‘piggy-banks’, the same small clique borrowed from all the banks and the banks made use of cross-financing to finance their own shares and shares of the other banks.

The report shows clearly that the banks’ principal shareholders were also the banks’ largest borrowers. At Kaupthing, the second largest debtor was Exista, a listed company ruled by Agust and Lydur Gudmundsson. Robert Tchenguiz had been on the board of Exista since early 2007 and was, as the bank collapsed, the bank’s largest debtor, with a debt of ISK200bn, ca €1,7bn, which also makes him the largest single debtor in Iceland. – In Iceland, foreigners with strong ties to Iceland are called ‘Íslandsvinir,’ ‘friends of Iceland. Tchenguiz’ strong ties to Iceland add a new meaning to the word ‘Íslandsvinur.’ – Another large debtor in Kauphing and a large shareholder is Olafur Olafsson who still owns the shipping company Samskip.

Bjorgolfur Thor Bjorgolfsson and his father, Bjorgolfur Gudmundsson, were the main shareholders at Landsbanki. Bjorgolfsson was also the main shareholder in the investmentbank Straumur. In total, father and son owe Landsbanki over ISK200bn which is more than Landbanki’s entire equity. At Straumur father and son are also the bank’s largest debtors.

At Glitnir, the largest borrower was Baugur and related companies/investors. Jon Asgeir Johannesson, his wife Ingibjorg Palmadottir (who miraculously still owns the 101 Hotel in Reykjavik), his father Johannes Jonsson as well as his mother in total owed ISK250bn to the banks. Related to Johannesson is his business partner for many years Palmi Haraldsson. From 1998 Johannesson had been trying to become a principal shareholder in an Icelandic bank but it wasn’t until mid-year 2007 that he and Haraldsson finally got hold of a bank, Glitnir. Their borrowing, already high, accelerated. As the bank collapsed Baugur and related companies owed more than ISK250bn, equal to 70% of the bank’s equity base.

In addition to using the banks as their personal piggy-banks, the largest shareholders seem to have swayed the investments of the banks’ money market funds towards their own companies and the banks themselves. Consequently, the funds lost heavily. The Icelandic money market funds never operated as normal MMFs, were i.a. not independently rated. In addition, the funds were marketed as ‘as save as current accounts, only with better interests.’

The management of the banks’ MMFs is a chapter in itself in this sad story. In a Glitnir fund a politician from the Independence Party was on the board. Whether it mattered in the end is an open question but the state did put money into the funds in order to minimize the losses – an action that still raises questions as to political influence in the collapse and why these funds were helped thereby helping many individuals, typically middle class professionals.

There is no doubt that quite a number of court cases will arise from the collapse of the Icelandic banks. The other day, I was walking towards the pond, ‘Tjornin,’ in the heart of Reykjavik when I saw a firework exploding over the hill beyond the pond. It reminded me that when I was in Naples in the summer of 2007 there were bursts of fireworks almost every day. A Neapolitan friend explained that it was customary to celebrate the release of a prisoner with fireworks – and that was happening all the time because of an amnesty to diminish the prison population. Since no one has yet been put in prison because of the banks this single firework can’t have had anything to do with a prison sentence. Perhaps Icelanders, who are the most firework-happy population on earth on New-years eve, will one day learn to use fireworks to express relief when those responsible for the banks’ collapse will be convicted.

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